How Safe is Teva? (TEVA)
This week we started compiling a list of safe stocks for a new bear market, and Teva Pharmaceutical Industries Limited (NASDAQ: TEVA) came up in our screens. We ran the piece during this morning there, and unfortunately the slide continued on Friday.
For starters, these are of course very long term in nature. Pharmaceutical stocks have historically offered safe havens during harder times due to the nature of your life depending upon them. Healthcare reform is changing that and many drug stocks have been dead money for quite some time.
Teva does have a disadvantage over some of the other large-cap pharma stocks. Its dividend is low. It is also based in Israel, but most of its revenue comes from North America. The latest quarter’s North America revenues rose 17% to $2.48 billion out of $3.8 billion in revenues. The company also just closed on its RatioPharm deal for $5 billion.
Despite beating earnings expectations, shares remain weak. After a 1.2% close on Friday at $49.97, Teva is relatively close to its 52-week low as the range is $46.99 to $64.95. The thought of getting a shot of owning Teva after a 23% sell-off is enticing.
Here was our note on “Safe stocks in a new bear market”:
The drug and pharmaceutical sector has been a defensive sector in the past, but that has been less of a case with healthcare reform coming. Generics offer some safety in a stormy sea, and no company has been better than Teva Pharmaceutical Industries Limited (NASDAQ: TEVA) in the group. Teva is actually based in Israel, it has been making selective acquisitions to get a larger international footprint, it has some branded drugs that are not generics, and its stock has pulled back considerably from the March and April highs when it almost reached $65.00 per share. Because it has been an acquirer and because its stock has risen, its dividend yield is lower than most drug companies at an implied yield today of roughly 1.3%.
What investors have here is growth that has not been seen elsewhere. Earnings were $3.37 EPS in 2009, but Thomson Reuters has estimates of $4.56 EPS in 2010 and $5.10 EPS in 2011. Based on the near 20% pullback from the highs, this gives forward expected P/E ratios of 11.1 for 2010 and 9.9 for 2011. There is a substantial room for dividend growth ahead. Its $45 billion market may sound high, but that is actually nowhere near the largest drug makers. Thomson Reuters also shows an average analyst price target of above $67.00, implying upside of more than 30% because of the pullback.
We’ll be keeping our eyes out on the tape for any extra news. So far, the recent pullback looks to have created a better long-term opportunity.
JON C. OGG
Comments
Leave a Reply
